Law Commissions call for consumer protections to be extended to end user licence agreements

Out-Law News | 25 Mar 2013 | 10:35 am | 4 min. read

Legal protections preventing the inclusion of unfair contract terms in consumer contracts should be extended to apply to less formal notices, such as those included as part of software end user licence agreements (EULA), law reform bodies have said.

The Scottish Law Commission and the Law Commission, which review and recommend changes to the law in Scotland, England and Wales respectively, said that although these clauses were "usually unenforceable", they often had a "damaging effect by discouraging consumers from claiming their rights". They said that regulators should be given the power to remove legal "jargon" from EULAs.

The Law Commissions had been asked to update the advice on ways to simply the current unfair contract terms regime that they provided to the UK Government in 2005 in light of recent court decisions. They had previously recommended that the UK Government create a single, harmonised regime to replace the two pieces of legislation that set out the current law. These are the Unfair Contract Terms Act (UCTA), which deals with exclusion clauses, and the Unfair Terms in Consumer Contracts Regulations (UTCCR), which give effect to the EU's Unfair Terms Directive and cover a greater variety of non-negotiated terms.

Other changes recommended by the Law Commissions in their updated advice (138-page / 391KB PDF) include tougher action on 'hidden charges', and additions to the so-called 'grey list' of terms which may be regarded by enforcement bodies as unfair. They called for clarity over an exemption from the fairness requirement which currently applies to the main subject matter of the contract and the price. According to their advice report, a "large majority" of respondents to the Law Commissions' consultation on unfair terms thought that this area of the law was "unduly uncertain" following a 2009 Supreme Court decision on bank charges.

"The current law is baffling – so much so that consumers and regulators are reluctant to challenge unfair charges," said David Hertzell, one of the Law Commissioners. "Both traders and consumers need clearer law. If a price is transparent and prominent, the courts should not interfere - but other charges need to be fair. Our approach gives traders control over what charges are exempt from review - provided they put them upfront."

The Supreme Court case was a test case brought by consumer protection regulator the Office of Fair Trading (OFT) against seven banks and one building society. It concerned whether charges for unauthorised overdrafts were exempt from the general fairness rule because they were price terms. The UTCCR excludes main subject matter and price from the requirements provided that these are presented in "plain intelligible language".

As the case progressed through the courts, the High Court and Court of Appeal found that the terms were not exempt because they were not part of the "essential bargain" between the parties, and the typical consumer would not recognise the fees as part of the price. However, the Supreme Court said that price terms could not be divided into essential and ancillary, and that the price should be determined "objectively" rather than from the viewpoint of a typical consumer. Assessed in this way, the overdraft charges fell within the exemption and could not be assessed for fairness, the Supreme Court said.

According to the Law Commissions, every consumer group that responded to its consultation agreed with the need for reform of the "unduly uncertain" law following this decision. The majority of businesses and business groups, public bodies, judges and lawyers said the same, it said. However financial services law expert Alexis Roberts of Pinsent Masons, the law firm behind Out-Law.com, pointed out that the Financial Services Authority (FSA) had disagreed with Law Commissions in its own response to the consultation.

"The Law Commissions' recommendations to the Government do not accept certain key points raised by the FSA in its feedback to the Commissions' consultation process - the FSA's view being that the current law is not uncertain," he said. "The Commissions' proposals could create uncertainty as to how prior FSA findings on unfair terms will apply, and to how the financial services regulator will develop its own regime for fairness of terms and conditions which runs in parallel with the new law, creating lack of clarity for the industry."

The Law Commissions had previously considered what effect revised unfair terms legislation should have on EULAs. These commonly accompany contracts for software and other digital products, and can include terms about how far the consumer may copy the information or restrictions of liability. It was the Commissions' view that terms which "simply reproduced" existing copyright law could not be subject to the legislation as they merely "reproduce the default law", but that clauses which attempt to exclude the software provider's liability under privacy, negligence or libel laws should be excluded.

In its 2005 report, the Commissions proposed extending the existing regime to include "notices which purported to exclude or restrict business liability resulting from negligence". It is now proposing to extend the protections more widely, pointing out that many exclusions contained in EULAs refer to "other forms of liability, including liability for defamation or breach of privacy". It added that some of those exclusions were written in "such vague, general terms that it is difficult to pin-point what liability is intended to be excluded".

"This will not be a major change," they said in their advice paper. "UCTA already offers protection against notices which purport to exclude or restrict liability for negligence. And in all the cases we have looked at, the purported exclusion was void in any event. The laws of the UK do not permit a business to protect itself against the possibility of legal action simply by putting up a notice, but such notices are routinely used in the online environment."

The practical effect of the proposed change would be to allow enforcement bodies, such as the OFT, to take action to remove notices, and to bring action against EULAs "without complex legal arguments about whether the licenses were or were not contracts", they said.

Commercial law expert Ben Gardner of Pinsent Masons said that the Law Commissions' desire to address specific areas of uncertainty in relation to unfair contract terms was a "welcome move from both a consumer and a business perspective".

"Whilst added clarity will help consumers to apply the necessary legal rules with an increased amount of confidence it will also protect businesses against inadvertently relying on unfair contract terms which, in certain circumstances, can prove costly," he said. "The move follows increased interest at a European level in protecting consumers, especially when it comes to terms which require a significant level of expertise to navigate, understand and interpret."